Energy

The energy crisis is real, but it is not a


result of our running out of energy sources. It
is an energy policy crisis, caused from start to
finish by laws and regulations that have discouraged

energy production and have reduced incentives for

users to conserve energy. The energy crisis is a
clear example of the kind of trouble politicians
cause when they constrict and control the economy

- - 
NO. 2 or Short run political goals

President Carter, and before him Presidents

Nixon and Ford, proclaimed it our national objective
to reduce dependence upon imported oil, but all three Administrations
introduced policies that have restricted domestic production of oil,
gas, coal, and alternative energy sources. The price controls on
oil, along with the refinery "entitlements" system, subsidized the
imports of oil and stimulated OPEC to raise world prices even
further.

United States foreign policy has been warped by its OPEC con?
nection. Recently we learned that Henry Kissinger encouraged the
shah of Iran to promote the initial dramatic jump in OPEC prices
in 1973 in order to finance his military equipment purchases. The
Nixon Administration viewed the shah as its military client in the
Middle East, and it knew that Congress would never agree to send
him all the money the Administration wanted. Today the Carter
Administration has launched a new Cold War offensive over the Afghan-
istan invasion. complete with a revival of draft registration,
because of its desire to guarantee continued access to Mideast oil,
by military means if necessary. The entire idea of "energy inde-

pendence" -- which makes no economic sense at all is part of the
on?going strategy for an interventionist foreign policy, which I
oppose.

I advocate, instead, a policy of free market prices for oil,
gas, coal, and new energy sources such as solar power. shale, and
fuels. I would remove all restrictions on imports of

Ed ClorkforPresioem Commi?ee - 2300 Ave . NW 0 Washington, DC 2000? - [203333-8263

 

The U.S. Energy Crisis 2-2?2-2

oil because the free market will determine the "correct" volume
of imports. Concern over excessive import dependence is mis-
placed: for the past several decades the free market has been
distorted by price controls. subsidies, import quotas and fees.
With the elimination of these restrictions on domestic production
and distortions in the prices of energy. the proportion of oil
that this country imports from unstable parts of the world may
well decline: but consumers in a free market. not politicians and
diplomats, should make the decisions.

SOURCES OF THE PRESENT CRISIS

The present energy crisis actually began in the natural gas
industry in 1954. In that year the Supreme Court reinterpretated
the Federal Power Act to place price controls on the well?head
price of gas. For more than a quarter of a century. the price
was kept so low that new discoveries of natural gas declined,
existing reserves were depleted at an accelerating rate. and be-
cause of uncertainties in supply in the industrial Northeast,
many industries were encouraged to locate in the sunbelt regions
of the country where gas supplies were assured.

The crisis in energy was extended to the petroleum sector
by President Nixon in 1971, when he imposed wage and price controls.
The Nixon controls program produced shortages in almost every in-
dustry and was eventually phased out but not for the petroleum
industry. A gigantic political struggle among ?refiners. producers.
and consumers to cut up the economic pie developed instead. This
is always the consequence of economic controls: interest groups
are created with prizes to be won in the political arena. Dom-
estic oil producers lost the political struggle. and as a result
domestic oil production has declined. The decrease in domestic
production and the I'entitlements'1 subsidy for imported oil have
worsened the situation of the United States relative to OPEC.

The independent gasoline marketers obtained special political
privileges under the mandatory allocation system for refined pro-
ducts, which assured each retailer of guaranteed quantities to
sell. Unfortunately, with rising prices for gasoline the pattern
of demand changed over time and the system produced shortages and
lines at gasoline pumps in some areas of the country in 1979,
and surplus inventories in other areas of the country. As a De-
partment of Energy Official said during the gas lines of 1979,
the allocations program "put the gas where the peeple aren't."
Ironically. the shortages of gasoline in California, Washington.
and New York led to political demands for gasoline rationing 
even though it was the government's mandatory allocation system
that caused the distribution problems in the first place.

The coal industry, which one might think would benefit with
the problems of petroleum and natural gas, has suffered from po-
litical conflicts as well. Restriction of coal leasing on govern-

The U.S. Energy Crisis 3-3?3-3

meat-owned land, environmental policy restrictions against the
surface mining and burning of coal, and coal mine safety and
health regulations that have lowered the productivity of mines
but not contributed to increased health or safety. have all
worked to reduce the feasibility of coal as an energy source
for the United States. We can solve the problems of the pro?
duction and use of coal by applying the principle of private
proPerty rights. I favor establishing property rights in those
areas where the government now controls land and water resources.
The sale of public lands in the Western states would resolve
this issue of access for mineral development as well as the
concern of the environmental movement for preserving wilderness
areas and restoration of strip-mined landsIr since concerned en-
vironmental groups or individuals could make outright purchases
of equity interests. Environmental problems can also be better
solved by the application of private property rights. Rather
than costly, burdensome. yet often ineffective regulations, I
would favor the application of the traditional common?law rule
that no one may force another person to breathe harmful pollu?
tion. These solutions would take two of today's most bitter
political conflicts out of the realm of "winner?take-all" political
conflict and permit mutually cooperative resolutions.

The outer continental shelf, where much potential oil and gas
production is located, should be managed in the same way as I

propose for the government lands in the West. with sales to pri-
vate interests for development or preservation as the owners choose.
Owners would be in a position to recover for any pollution damages
or other harm. for example to fishing grounds, from companies
engaged in offshore drilling. without bureaucratic restrictions.

The questions of land use and the relative values that should be
placed on alternatives for development, pollution control. or
wilderness preservation can be easily solved in the free market,

once the political process in terminated and property rights are
permitted to emerge.

ENERGY FUTURE

The energy crisis has been debated by many people as if
America or the world were running out of oil and gas. This ver?
sion of disaster is an irrelevant horror story. The United States
alone has proven reserves of 27.3 billiOn barrels of oil -- more
than Libya, Venezuela, or Nigeria. Potential U.S. reserves are
estimated at between 276 billiOn and 444 billion barrels, or
enough to support current levels of consumption for the next 46
to 74 years without importing a single drop. To bring these
Potential reserves into production, all that is required in
most case is market pricing and removal of regulatory obstacles.

. . 4?4?4?4
The U.S. Energy Crisis

But even if we did not have these reserves, the fear of
running out of energy is unfounded. It is based on the idea of
a static economy, without new materials, new technology. new needs,
or new ideas. Predictions of disaster based on absolute scarc1ty
have been around at least as long as modern civilization itself,
bUt People have always discovered new ideas, new ways of solv1ng
problems, and new technical inventions. As long as the universe
exists. there will be an abundance of energy; the real issue is

one of economics. the least expensive way to harness our energy
resources.

The free market is the only system available for discovering
rue relative costs of energy production, and only the free

especially free market prices will give the correct
signals to consumers of energy to guide them toward the most effi-
cient uses of scarce fuels and the most economical ways to conserve
resources. Over the next few years, the prices of oil and gas

will go up, because we are running out of cheap supplies, but that
is a far cry from an absolute depletion of those resources. Most
of the surface of the earth has never been explored for oil and gas.
If producers are allowed to keep the fruits of their labor, as they
should, then we never will run out of oil and gas. Eventually, how-

ever, alternate energy sources will be cheaper and will begin to
replace them.

the 
marke

There are forecasts that solar power, fusion, and 
fuels from coal or shale will be the wave of the future. Other
energy experts swear by nuclear power, and disdain its critics who
worry about radiation and nuclear waste products. I have no precon-
ceived formula for America's energy future because no one really
knows what the relative costs of the various proposals will be in
thirty or forty years. Until the investments are made, and the
entrepreneurs with their new inventions actually face the risks
of consumer selection, no amount of science fiction or "scientific"

predictions can tell us what the cheapest energy source in the future
will be.

But no amount of government planning, or dumping of tax dollars
into fuel schemes, will get us to the new energy frontier
any more effectively than a program of complete deregulation of
energy prices. Indeed, government subsidies and attempts at govern-
ment planning will only lead to wasted capital investment and false
expectations. We have seen how government subsidies of nuclear
energy have led to public controversy and serious questions regard?
ing nuclear safety. Government intervention in the energy industries
is our biggest policy mistake and one that the federal government
seems about to repeat with its fuel schemes. Every dollar
invested by the government today in a fuel process that
ultimately proves to be a failure is a dollar that might have, instead,

The U.S. Energy Crisis 5?5-5-5

been invested by private entrepreneurs assuming full risk in

enhanced oil recovery, or deep gas exploration, or new sources
of energy.

Solar energy may be the best long-run source of electric
power, but a number of technological breakthroughs need to be
made. One of the biggest barriers to solar power development
is the system of public utility regulation in the United States.
Public utilities are given monopoly privileges by state and local
governments, and their use of the power of eminent domain to
condemn property and rights-of-way is a blatant violation of
individual rights. The prices that public utilities charge for
gas and electricity are typically set by some government agency,
not by any considerations of economic opportunity costs. The
principle of "rolled in" prices for incremental supplies prevents
marginal users of energy from recognizing the true social costs of
consumption, because the costs are spread out over all of the
users of energy from that public utility; all of the old customers
are forced to subsidize the increase in demand by the new ones.
Solar power, on the other hand, is an investment that must be fully
financed by the person who installs a new solar collector. As
long as public utility monopolies exist, with government'agencies
setting their prices in order to subsidize marginal users, solar
power will never be able to develop to full potential. Other
obstacles to alternative sources of energy must also be removed.
Building codes in many cities, for instance, forbid the use of
solar power to heat homes. The public unilities work hard to
prohibit any kind of competition. There is a process called co?
generation, which used to be widely used in the United States.
When factories generate processed steam in the course of their
activities, they can install turbines and "co-generate" electric
power with this excess steam, instead of letting it go to waste.
But the public utilities commissions in most states have ruled that
only utilities may produce electric power, and they have thus

prohibited companies from producing their own power.

Restrictions
like these must be ended.

My solution to the energy problems of today and my prescription
for future development is to abolish regulations and monopoly priv-
ileges that prevent competition and the true relative pricing of
alternative energy sources. It must be emphasized that a free mar-
ket in energy is not an impractical, utopian dream. It is the only
program that establishes the correct incentives, puts a true value
on the alternative uses of scarce resources, permits producers to
work at top speed to solve the energy supply problems, and gives

consumers a true picture of energy costs so that they can decide
exactly how much conservation is needed.

Consumers have never benefited from government price controls
and production regulations. Some special interests have profited
from government subsidies, regulations, and controls, but the great

The U.S. Energy Crisis 6-6-6-6

majority of us are poorer because of these policies. Moreover,
the attempt by government to bestow economic benefits on some
classes of people at the expense of others is fundamentally un-
just and unethical. The free market is the only system of
economic organization that recognizes each individual's right
to keep and enjoy the fruits of his or her labor. and to trade
with others for mutual benefits. When governments step
in. with their police powers to prevent producers and consumers
from reaching voluntary agreements, they destroy the equity of
trade, the respect for contracts, and the incentives for people

to invest. invent. or create new ways to solve the ancient
problems of poverty.

We can solve the energy crisis if the government will get
out of the way and let consumers and producers find the answers.



Research assistance for this paper was provided by Joe Cobb,
Director of Energy Policy for the Council for a Competitive

Economy, and by Dom Armentano. Professor of Economics at the
University of Hartford.